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COMMENTARY

To DIY or not to DIY: Does an FI need its own payment app?

By now, it should be obvious to every bank that no company can afford to neglect mobile payments.

However, there remains a debate about how best to go about implementing mobile payment solutions to meet growing consumer demand. For many banks, the first and most crucial choice is whether to go it alone by creating their own mobile wallet app, or take advantage of existing ecosystems like Apple Pay or Android Pay.

Several banks have opted for the bespoke approach, such as Chase's Chase Pay and Citibank's Citi Pay — but is that always the best choice? Let’s investigate.

The pros and cons of building a standalone app

It is essential for banks to explore all options and developments in the sector before embarking on a scheme to create a standalone app. The main benefit to a standalone app is control — each bank can dictate every aspect of the process, enabling it to come up with a solution that exactly fits its customers' needs.

As there is no need to rely on a third party or be limited by the restrictions they impose, it allows them to develop a solution that is tailored to the exact needs of their user base, creating a much better customer relationship.

However, it is also an undertaking that will require serious investment, both for technology providers and for retailers who must pay to put the necessary infrastructure in place to accept such payments. The payments ecosystem is a highly complex multistakeholder environment, which dramatically increases the barrier to adoption.

Large retailers such as Walmart and Starbucks even have their own mobile payment offerings as they work to reduce their payment transaction costs. With so many mobile wallet options to choose from, consumers will look for a payment method that is easy to use, potentially attractive financially for them, and is available when and where they need it.

Creating a new solution in this space from scratch is an activity that carries a great deal of risk, should the result not function as promised, or fail to provide the user with the expected experience.

Making mobile as frictionless as possible

Ultimately, the goal of any mobile wallet application needs to be to make the payment experience as frictionless as possible. With Apple Pay and Android Pay, users simply tap the phone's NFC chip to a contactless sensor and the transaction is complete.

More and more retailers now support in-app mobile payments for online purchases and mobile orders, meaning that they can integrate directly with Android Pay in their own app, removing the need for extra steps.

Apple Pay’s ubiquitous availability makes this offering quite alluring to consumers. There are now more than 4,000 issuers who work within the Apple Pay Wallet and, as TechCrunch mentions, Apple Pay is now at more than 50 percent of all retail locations in the U.S., including 67 of the top 100 U.S. retailers.

The ability to compete in such an environment is hard for all but the largest of institutions to be able to remotely have a chance to support. Size dictates relevance.

The price of entry

However, even the largest players have to spend significantly to enter the space. Chase has spent $100 million on Chase Pay and continues to work on new methods to increase consumer adoption of its mobile offering.

The fact that Apple Pay and Android Pay rely on the phone's built-in NFC hardware also means that there are no issues surrounding acceptance to worry about. If a merchant is equipped to take a contactless payment, it should be able to accept a mobile payment using these wallets.

This may not always be the case with bank-specific apps, depending on the technology used. For instance, until recently, Apple did not permit third parties to use its NFC capabilities, and while it is now opening this up, it can't yet be used for payments, and NFC uses are only available within an app.

As a result, existing services have to rely on alternative solutions such as QR codes in order to make a transaction, which means there is a need to invest resources into building up a network of supporting merchants in order to drive use.

Not only does this add to the complexity of such a strategy, it makes the solution less ubiquitous. The key factor for many consumers is the element of choice — knowing that they will be able to make a payment however they want, wherever they are. If they are uncertain about whether their preferred method will be accepted, they may be more likely to avoid it altogether.

Extra steps like opening app and tapping an icon to generate the necessary code also create friction for the end user, which will ultimately make this type of app less successful.

Consumers want simplicity when it comes to payments, and retailers are no different. Signing up for the likes of Android Pay, on the other hand, offers financial institutions a much cheaper point of entry into mobile payments with infrastructure that is already in place, which may be the deciding factor for many decision-makers.